Ton échange

The Uber of Hedge Funds

The world has been the witness of some great technological innovations since the beginning of this century (e.g. the Internet, the Blockchain1). Nowadays, information is everywhere and people try to collect it, creating big datasets, which are basically numerical descriptions of reality. Big companies have understood that knowing how to handle big data could be beneficial for business (e.g. Amazon); the more you know what is happening in reality, the better your decision will be. However, in some industries, high-quality data is rare and expensive, and thus considered as a precious asset (e.g. financial institutions).

The high-quality stock market data is guarded by data monopolies and hedge funds2

Competition has always been very high in finance; most actors do not openly collaborate together because everyone wants to have the biggest piece of cake. Particularly, having the right information leads to private benefit from beating the market.

“Once you have a model in finance that works, you hide it. You hide the techniques you used to build it. You hide the methods you used to improve your data. And most importantly, you hide the data. The financial incentive for secrecy is strong.” Richard Craib, founder of Numerai.

If keeping precious and expensive datasets inside your hedge fund provides a strong competitive advantage, then why would you share it? Are there any incentives to do so?

In fact, network effects3 does not exist in finance. So far.

“The web and internet services have figured out how to harness these network effects to build Goliath companies like Uber and Facebook, but the financial services industry never figured out how to do that.” Carlson-Wee, founder of Polychain Capital.

What if skilled people around the world could collaborate together in order to make stock markets more efficient?

Knowledge can be shared in order to make better predictions

Claim: “The stock market is probably somewhat inefficient with respect to new developments in machine learning because only a tiny fraction of the global machine learning talent has access to its data.”

That was the idea of the 29-year-old South African, Richard Craib. He founded Numerai, the first hedge fund issuing cryptocurrencies. The purpose of Numerai is to incentivize thousands of data scientists around the globe to share their predictions of the stock market. Numerai enables us to use the intelligence from the crowd in order to improve market predictions by creating a meta-model4 derived from thousands of different models.

“Finance is totally competitive right now. There’s no reason why you’d want to help your friend with a hedge fund if you have a hedge fund. But if you both held the same cryptocurrency, and it went up in value together, maybe there would be more collaboration.” Richard Craib, founder of Numerai.

“To solve a machine learning problem, open participation is key.”

Innovations from different areas

As the overall performance of traditional hedge funds is declining nowadays5, innovations in machine learning6, crowd sourcing7 and cryptography8 are changing the world of finance. Numerai is the first hedge fund that provides encrypted free data to the worldwide community of data scientists. The encryption is an innovation in itself because it enables to share high-quality datasets without losing any predictive structure. Before Richard’s idea, the techniques used for encoding a message could not keep safe any useable patterns, such that data became useless for creating any prediction model.

“Breakthrough encryption techniques can be used to encrypt stock market data while still keeping it useful for machine learning experts. “

Knowledge in exchange for cryptocurrency

Instead of relying on a small team of employees like in traditional hedge funds, Numerai enables open participation by data scientists around the world. Everyone who knows how to handle data can create a model and share it with the community in exchange for Numerai tokens. If predictions provided are right, then the Numerai tokens are transformed into Ethereum9 cryptocurrency and contributors of the meta-model’s performance are rewarded.

“This is like step 2 towards a fully decentralized hedge fund powered by cryptocurrency and the token model…. It’s another step towards really creating an AI hive mind where the application happens to be trading on financial markets.” Fred Ehrsam, cofounder of Coinbase.

“The best hedge funds in the world have 200-300 employees, so how well can a hedge fund with 100’000 data scientists do ?” Richard Craib, founder of Numerai.